Thoroughly explain Tesla’s use of regulatory credits to log revenue and offset operating costs. Is Tesla able to choose in which quarters these credits are recognized?
ZEV credits (ZEV=zero emission vehicle) are awarded to car makers who sell electric or hydrogen cell powered cars in certain participating states. Each car earns differing levels of credit based on the range of the vehicle and certain characteristics such as if the vehicle is purely electric or a hybrid gas/electric car. In the states that participate in this program, car makers are required to earn, or purchase on the market, a certain number of ZEV credits relative to the number of cars they sell in that state.
In US, each car needs to maintain certain emission standards and failure to meet those standards could lead to hefty fines. Auto makers like Tesla have more credit than required due to Zero emission on electricity run car, other automakers are always in need to credits and Tesla by selling those credits earn extra revenue.
Tesla as an accounting policy recognizes the revenue when a contract with buyer is concluded and Credits are delivered. Since, emission compliance is annual requirement leaving a lot to be desired from accounting point as Company may choose not to sell one particular quarter and sell in another quarter for meeting revenue expectations.
In face, Tesla annual report for 2020 outlines this fact that revenue from sale of credit varies quarter to quarter due to their policy of recognising the revenue on delivery of credit.
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